Pre-Columbian and Colonial Era

The first Spanish explorers of Nicaragua found a well-developed agrarian society

Agrarian society

An agrarian society is a society that depends on agriculture as its primary means for support and sustenance. The society acknowledges other means of livelihood and work habits but stresses the importance of agriculture and farming, and was the most common form of socio-economic oganization for...

 in the central highlands and Pacific lowlands. The rich volcanic soils produced a wide array of products, including beans, peppers

Capsicum

Capsicum is a genus of flowering plants in the nightshade family, Solanaceae. Its species are native to the Americas where they have been cultivated for thousands of years, but they are now also cultivated worldwide, used as spices, vegetables, and medicines - and have become are a key element in...

, corn

Maize

Maize known in many English-speaking countries as corn or mielie/mealie, is a grain domesticated by indigenous peoples in Mesoamerica in prehistoric times. The leafy stalk produces ears which contain seeds called kernels. Though technically a grain, maize kernels are used in cooking as a vegetable...

, cocoa, and cassava

Cassava

Cassava , also called yuca or manioc, a woody shrub of the Euphorbiaceae native to South America, is extensively cultivated as an annual crop in tropical and subtropical regions for its edible starchy tuberous root, a major source of carbohydrates...

 (manioc). Agricultural land was held communally, and each community had a central marketplace

Marketplace

A marketplace is the space, actual, virtual or metaphorical, in which a market operates. The term is also used in a trademark law context to denote the actual consumer environment, ie. the 'real world' in which products and services are provided and consumed.-Marketplaces and street markets:A...

 for trading and distributing food.

The arrival of the Spanish in the early 16th century destroyed, for all intents and purposes, the indigenous agricultural system. The early conquistadors were interested primarily in gold

Gold

Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...

; European diseases and forced work in the gold mines decimated the native population. Some small areas continued to be cultivated at the end of the 16th century, but most previously tilled land reverted to jungle

Jungle

A Jungle is an area of land in the tropics overgrown with dense vegetation.The word jungle originates from the Sanskrit word jangala which referred to uncultivated land. Although the Sanskrit word refers to "dry land", it has been suggested that an Anglo-Indian interpretation led to its...

. By the early 17th century, cattle

Cattle

Cattle are the most common type of large domesticated ungulates. They are a prominent modern member of the subfamily Bovinae, are the most widespread species of the genus Bos, and are most commonly classified collectively as Bos primigenius...

 raising, along with small areas of corn and cocoa cultivation and forestry, had become the primary function of Nicaragua's land. Beef, hides, and tallow

Tallow

Tallow is a rendered form of beef or mutton fat, processed from suet. It is solid at room temperature. Unlike suet, tallow can be stored for extended periods without the need for refrigeration to prevent decomposition, provided it is kept in an airtight container to prevent oxidation.In industry,...

 were the colony's principal exports for the next two and a half centuries.

The Coffee Boom, 1840s—1940s

Coffee

Coffee

Coffee is a brewed beverage with a dark,init brooo acidic flavor prepared from the roasted seeds of the coffee plant, colloquially called coffee beans. The beans are found in coffee cherries, which grow on trees cultivated in over 70 countries, primarily in equatorial Latin America, Southeast Asia,...

 was the product that would change Nicaragua's economy. Coffee was first grown domestically as a curiosity in the early 19th century. In the late 1840s, however, as coffee's popularity grew in North America

North America

North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...

 and Europe

Europe

Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...

, commercial coffee growing began in the area around Managua

Managua

Managua is the capital city of Nicaragua as well as the department and municipality by the same name. It is the largest city in Nicaragua in terms of population and geographic size. Located on the southwestern shore of Lake Xolotlán or Lake Managua, the city was declared the national capital in...

. By the early 1850s, passengers crossing Nicaragua en route to California

California

California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...

 were served large quantities of Nicaraguan coffee. The Central American coffee boom was in full swing in Nicaragua by the 1870s, and large areas in western Nicaragua were cleared and planted with coffee trees.

Unlike traditional cattle raising or subsistence farming, coffee production required significant capital and large pools of labor. Laws were therefore passed to encourage foreign investment and allow easy acquisition of land. The Subsidy Laws of 1879 and 1889 gave planters with large holdings a subsidy of US$0.05 per tree.

By the end of the 19th century, the entire economy came to resemble what is often referred to as a "banana republic

Banana republic

In political science, the pejorative term Banana Republic denotes a politically unstable country dependent upon limited primary productions , which is ruled by a plutocracy, a small, self-elected, wealthy group who exploit the country by means of a politico-economic oligarchy...

" economy — one controlled by foreign interests and a small domestic elite oriented toward the production of a single agriculture export. Profits from coffee production flowed abroad or to the small number of landowners. Taxes on coffee were virtually nonexistent. The economy was also hostage to fluctuations in the price of coffee on the world markets — wide swings in coffee prices meant boom or bust years in Nicaragua.

Diversification and Growth, 1945—77

The period after World War II

World War II

World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

 was a time of economic diversification. The government brought in foreign technocrats

Technocracy (bureaucratic)

Technocracy is a form of government where technical experts are in control of decision making in their respective fields. Economists, engineers, scientists, health professionals, and those who have knowledge, expertise or skills would compose the governing body...

 to give advice on increasing production of new crops; hectarage in banana

Banana

Banana is the common name for herbaceous plants of the genus Musa and for the fruit they produce. Bananas come in a variety of sizes and colors when ripe, including yellow, purple, and red....

s and sugarcane

Sugarcane

Sugarcane refers to any of six to 37 species of tall perennial grasses of the genus Saccharum . Native to the warm temperate to tropical regions of South Asia, they have stout, jointed, fibrous stalks that are rich in sugar, and measure two to six metres tall...

 increased, livestock herds grew, and cotton

Cotton

Cotton is a soft, fluffy staple fiber that grows in a boll, or protective capsule, around the seeds of cotton plants of the genus Gossypium. The fiber is almost pure cellulose. The botanical purpose of cotton fiber is to aid in seed dispersal....

 became a new export crop. The demand for cotton during the Korean War

Korean War

The Korean War was a conventional war between South Korea, supported by the United Nations, and North Korea, supported by the People's Republic of China , with military material aid from the Soviet Union...

 (1950—53) caused a rapid increase in cotton production, and by the mid-1950s, cotton was the nation's second largest export earner, after coffee.

Economic growth continued in the 1960s, largely as a result of industrialization. Under the stimulus of the newly formed Central American Common Market, Nicaragua achieved a certain degree of specialization in processed foods

Food processing

Food processing is the set of methods and techniques used to transform raw ingredients into food or to transform food into other forms for consumption by humans or animals either in the home or by the food processing industry...

, chemicals, and metal manufacturing. By the end of the 1960s, however, import substitution industrialization as a stimulus for economic growth had been exhausted. The 1969 Football War

Football War

The Football War , also known as the Soccer War or 100 hour War, was a four-day war fought by El Salvador and Honduras in 1969. It was caused by political conflicts between Hondurans and Salvadorans, namely issues concerning immigration from El Salvador to Honduras...

 between Honduras

Honduras

Honduras is a republic in Central America. It was previously known as Spanish Honduras to differentiate it from British Honduras, which became the modern-day state of Belize...

 and El Salvador

El Salvador

El Salvador or simply Salvador is the smallest and the most densely populated country in Central America. The country's capital city and largest city is San Salvador; Santa Ana and San Miguel are also important cultural and commercial centers in the country and in all of Central America...

, two members of the CACM, effectively suspended attempts at regional integration until 1987, when the Esquipulas II agreement was signed. By 1970 the industrial sector was undergoing little additional import substitution, and the collapse of the CACM meant that Nicaragua's economic growth, which had come from the expanding manufacturing sector, halted. Furthermore, the manufacturing firms that had developed under the tariff protection of the CACM were generally high-cost and inefficient; consequently, they were at a disadvantage when exporting outside the region.

Although statistics for the period 1970—77 seemed to show continued economic growth, they reflected fluctuations in demand rather than a continued diversification of the economy. The gross domestic product

Gross domestic product

Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....

 rose 13% in 1974, the biggest boom in Nicaragua's economic history. However, these figures largely represented the jump in construction as the country struggled to rebuild after the disastrous 1972 earthquake

1972 Nicaragua earthquake

The 1972 Nicaragua earthquake was an earthquake that occurred at 12:29 a.m. local time on Saturday, December 23, 1972 near Managua, the capital of Nicaragua. It had a magnitude of 6.2 and occurred at a depth of about 5 kilometers beneath the centre of the city. Within an hour after the main...

. Likewise, the positive growth in 1976—77 was merely a reflection of the high world prices for coffee and cotton.

Positive GDP growth rates in the 1970s masked growing structural problems in the economy. The 1972 earthquake destroyed much of Nicaragua's industrial infrastructure, which had been located in Managua. An estimated 10,000 people were killed and 30,000 injured, most of them in the capital area. The earthquake destroyed most government offices, the financial district of Managua, and about 2,500 small shops engaged in manufacturing and commercial activities. About 4% of city housing in Managua was left unstable.

Government budget deficits and inflation were the legacies of the earthquake. The government increased expenses to finance rebuilding, which primarily benefited the construction industry, in which the Somoza family

Somoza

The Somoza family was an influential political dynasty who ruled Nicaragua as an hereditary dictatorship. Their influence exceeded their combined 43 years in the de facto presidency, as they were the power behind the other presidents of the time through their control of the National Guard...

 had strong financial interests. Because earthquake reconstruction generated few new revenues, except through borrowing, most of the resulting public deficits were covered by foreign loans. In the late 1970s, Nicaragua had the highest level of foreign indebtedness in Central America.

Most of the benefits of the three decades of growth after World War II were concentrated in a few hands. Several groups of influential firms and families, most notably the Somoza family, controlled most of the nation's production. The Banamérica Group, an offshoot of the conservative elite of Granada, had powerful interests in sugar, rum, cattle, coffee, and retailing. The Banic Group, so-called because of its ties to the Nicaraguan Bank of Industry and Commerce (Banco Nicaragüense de Industria y Comercio-Banic), had its roots in the liberal families of León and had ties to the cotton, coffee, beer, lumber, construction, and fishing industries.

The third interest controlling the nation's production was the Somoza family, which had wide holdings in almost every segment of Nicaraguan society. Financial dealings for the Somozas were handled by the Central Bank of Nicaragua

Central Bank of Nicaragua

-External links:...

 (Banco Central de Nicaragua), which the Somozas treated as if it were a commercial bank. The Central Bank made frequent personal loans to the Somozas, which often went unpaid. Although the other financial groups used financial means primarily to further their interests, the Somozas protected their financial interests by controlling the government and its institutions. The Somoza family owned an estimated 10% to 20% of the country's arable land, was heavily involved in the food processing industry, and controlled import-export licenses. The Somozas also controlled the transportation industry by owning outright, or at least having controlling interest in, the country's main seaports, the national airline, and Nicaragua's maritime fleet. Much of the profit from these enterprises was then reinvested in real estate holdings throughout the United States and Latin America. Some analysts estimated that by the mid-1970s, the Somozas owned or controlled 60% of the nation's economic activity. When Anastasio Somoza Debayle

Anastasio Somoza Debayle

Anastasio Somoza Debayle was a Nicaraguan leader and officially the 73rd and 76th President of Nicaragua from 1 May 1967 to 1 May 1972 and from 1 December 1974 to 17 July 1979. As head of the National Guard, he was de facto ruler of the country from 1967 to 1979...

 (president, 1967—72, 1974—79) fled Nicaragua in 1979, the family's worth was estimated to be between US$500 million and US$1.5 billion.

Legacy of the Sandinista Revolution, 1977—79

By the mid-1970s, the government's economic and dictatorial political policies had alienated nearly all sectors of society. Armed opposition to the Somoza regimes, which had started as a small rural insurrection in the early 1960s, had grown by 1977 to a full-scale civil war. The fighting caused foreign investment to drop sharply and the private sector to cut investment plans. Many government expenditures were shifted to the military budget. As fighting in the cities increased, destruction and looting caused a large loss in inventories and operating stock. Foreign investment, which before 1977 had been a significant factor in the economy's growth, almost stopped. As the fighting intensified further, most liquid assets flowed out of the country.

Although the anti-Somoza forces finally won their struggle in July 1979, the human and physical cost of the revolution was tremendous. As many as 50,000 people lost their lives in the fighting, 100,000 were wounded, and 40,000 children were left orphans. About US$500 million in physical plants, equipment, and materials was destroyed; housing, hospitals, transportation, and communications incurred damages of US$80 million. The GDP shrank an estimated 25% in 1979 alone.

Sandinista Era, 1979—90

The new government, formed in 1979 and dominated by the Sandinistas, resulted in a new model of economic development. The new leadership was conscious of the social inequities produced during the previous thirty years of unrestricted economic growth and was determined to make the country's workers and peasants, the "economically underprivileged," the prime beneficiaries of the new society. Consequently, in 1980 and 1981, unbridled incentives to private investment gave way to institutions designed to redistribute wealth and income. Private property

Private property

Private property is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property. Private property is distinguishable from public property, which refers to assets owned by a state, community or government rather than by...

 would continue to be allowed, but all land belonging to the Somozas was confiscated.

However, the ideology of the Sandinistas put the future of the private sector and of private ownership of the means of production in doubt. Even though under the new government both public and private ownership were accepted, government spokespersons occasionally referred to a reconstruction phase in the country's development, in which property owners and the professional class would be tapped for their managerial and technical expertise. After reconstruction and recovery, the private sector would give way to expanded public ownership in most areas of the economy. Despite such ideas, which represented the point of view of a faction of the government, the Sandinista government remained officially committed to a mixed economy.

Economic growth was uneven in the 1980s. Restructuring of the economy and the rebuilding immediately following the end of the civil war caused the GDP to jump about 5% in 1980 and 1981. Each year from 1984 to 1990, however, showed a drop in the GDP. Reasons for the contraction included the reluctance of foreign banks to offer new loans, the diversion of funds to fight the new insurrection against the government, and, after 1985, the total embargo

Embargo

An embargo is the partial or complete prohibition of commerce and trade with a particular country, in order to isolate it. Embargoes are considered strong diplomatic measures imposed in an effort, by the imposing country, to elicit a given national-interest result from the country on which it is...

 on trade with the United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, formerly Nicaragua's largest trading partner. After 1985 the government chose to fill the gap between decreasing revenues and mushrooming military expenditures by printing large amounts of paper money. Inflation

Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

 skyrocketed, peaking in 1988 at more than 14,000% annually.

Measures taken by the government to lower inflation were largely wiped out by natural disaster. In early 1988, the administration of Daniel José Ortega Saavedra (Sandinista junta coordinator 1979—85, president 1985—90) established an austerity

Austerity

In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to...

 program to lower inflation. Price controls were tightened, and a new currency was introduced. As a result, by August 1988, inflation had dropped to an annual rate of 240%. The following month, however, Hurricane Joan cut a devastating path directly across the center of the country. Damage was extensive, and the government's program of massive spending to repair the infrastructure destroyed its anti-inflation measures.

In its eleven years in power, the Sandinista government never overcame most of the economic inequalities that it inherited from the Somoza era. Years of war, policy missteps, natural disasters, and the effects of the United States trade embargo all hindered economic development. The early economic gains of the Sandinistas were wiped out by seven years of sometimes precipitous economic decline, and in 1990, by most standards, Nicaragua and most Nicaraguans were considerably poorer than they were in the 1970s.

The Chamorro Era, 1990—1996

The economic policies of Violeta Barrios de Chamorro (president, 1990—1997) were a radical change from those of the previous administration. The president proposed to revitalize the economy by reactivating the private sector and stimulating the export of agricultural products. However, the administration's political base was shaky. The president's political coalition, the National Opposition Union (Unión Nacional Opositora

Unión Nacional Opositora

Unión Nacional Opositora can refer to either of two Nicaraguan political parties:* National Opposition Union* 1966 National Opposition Union...

-UNO), was a group of fourteen parties ranging from the far right to the far left. Furthermore, 43% of the voting electorate had voted for the Sandinistas, reflecting support for the overall goals of the former administration although not necessarily the results.

The Chamorro government's initial economic package embraced a standard International Monetary Fund

International Monetary Fund

The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 and World Bank

World Bank

The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

 set of policy prescriptions. The IMF demands included instituting measures aimed at halting spiraling inflation; lowering the fiscal deficit by downsizing the publicsector work force and the military, and reducing spending for social programs; stabilizing the national currency; attracting foreign investment; and encouraging exports. This course was an economic path mostly untraveled by Nicaragua, still heavily dependent on traditional agro-industrial exports, exploitation of natural resources, and continued foreign assistance.

Inspired by the IMF, Minister of Finance Francisco Mayoraga quickly put together an economic "Plan of 100 Days." This plan, also called the "Mayoraga Plan," cut the deficit and helped to lower inflation. Loss of jobs and higher prices under the plan, however, also resulted in crippling public and private-sector strikes throughout the country. Mayoraga's tenure in office barely exceeded the 100 days of his economic plan. By the end of 1990, the government was forced to abandon most of its freemarket reforms.

A series of political problems and natural disasters continued to plague the economy in 1991 and 1992. The need to accommodate left and right-wing views within its ruling coalition and attempts to work with the Sandinista opposition effectively prevented the implementation of unpopular economic measures. The government was unable to lower government expenditures or to hold the value of the newly introduced gold córdoba stable against the United States dollar. A severe drought in 1992 decimated the principal export crops. In September 1992, a tidal wave struck western Nicaragua, leaving thousands homeless. Furthermore, foreign aid and investment, on which the Nicaraguan economy had depended heavily for growth in the years preceding the Sandinista administration, never returned in significant amounts.